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Updated almost 14 years ago, 02/15/2011
What makes a neighborhood bad vs good?
I read some topics in the last couple of days talking about buying in lower income neighborhood. I am a little confused. What makes an area a war zone? It is strictly the crime rate in the area or does the average income also determine that?
Before I buy any property, I call the local police department and speak with someone to get more information on the neighborhood. I have decided to not move forward on couple of really appealing deals because the person I spoke with from the police dept told me not to. He said he wouldn't invest in that area if he had money to invest.
Basically, aside from talking to local police department and other investors in the area, what else should I be doing to make sure I am buying in a decent neighborhood. I am also in constant touch with local city Planning and Development Dept (mainly to confirm the zoning for the property). Any ideas will be much appreciated.
I check demographics data, such as education and income levels, unemployment and poverty rates, and school performance as well as actual crime statistics. But nothing beats visiting the neighborhood itself and having a look around. 10 minutes of driving will tell me more than 4 hours on the computer and telephone.
Do the homes show pride of ownership? Are there bars over the windows? Cars and/or appliances on the front lawns? Graffiti on every vertical surface? How close to industrial and commercial buildings are they? What about railroad tracks, freeways, drainage ditches, etc.?
Of course, visiting the neighborhood is time and money intensive if far away. That's primarily why I stick to properties within driving distance from home.
Mitch, thanks for the reply. I haven't been checking any demographics data, but I am going to start doing that. Thanks for the idea.
Another thing I actually do is drive around and talk to anybody I see on the street where I am considering buying a property. I also visit the area in the night just to get the feel.
I haven't seen any bars over the windows, no cars or appliances on the front lawns, no graffiti. I haven't noticed many boarded up houses either. Though every now and then, I will find an occasional empty beer bottle or can outside the property (anything to be real concerned about?.) The area is about 5-10 mins drive to a BP refinery and 15 mins drive to a big casino.
IMO, the area is not a war zone, just a low income neighborhood. The average gross monthly income of my tenants is about $2k. Would you expect similar issues investing in a war zone vs. low income neighborhood?
I have also wondered about the difference between low income and war zone areas. I try to look around and see how many houses are boarded up. I feel like it is ok to buy in an area that does not look amazing, as long as I know that going into the deal and I can see that there are not too many abandoned houses. I consider more than one in a few blocks too many. I would be curious to see how others draw the line to judge a war zone.
We had apartments in the bad neighborhoods and people would tell us we made a big mistake. We always dreamed of having an A apartment in a nice neighborhood. However, looking back we grew in the area we were in much faster. Had we been in the nicer neighborhoods, the prices would have been excessive and we would not have grown as fast as we did. You decide where it is most cost effective for you to invest and go for it.
Originally posted by Realtyman:
Could you clarify what you mean by bad neighborhood? High crime? Drugs? Violence? Low income? Boarded up houses? Were there areas you would have considered worse than the area you were in? Just trying to see how people draw the line. Thanks for sharing.
Choosing the right neighborhood is key. Why? Real estate derives its value from one major component - cash flow. Cash flow defines value. Cash flow gives value. All cash flow is derived from tenants. And the best tenants live in the best homes.
That said, my # 1 criteria for choosing a neighborhood is simple - I choose neighborhoods I would be happy living in. As simple as that is, it correlates nicely with 1) attracting and retaining the best tenants and 2) protecting my investment from deteriorating.
My criteria runs deeper after that:
Gravity of a neighborhood is a critical component of my decision making.
Availabity of opportunities in that neighborhood with the right returns, of course also factors in.
But if I had to choose between short term yield and the long term stability of a neighborhood I would live in, I'd take the latter all day long.
Mark Andrew Small
I think "bad neighborhood" is a very subjective term. For example, I'm eyeing a couple properties right now. Would I choose to live in them? No, I most certainly would not, not even by myself, and absolutely not with my wife and son. But are they "bad neighborhoods?" No, not at all. The people who live there have jobs and they pay (most of) their bills.
On the other hand, there are neighborhoods where you just know when you're driving through them that you're taking your life in your hands. And that gut instinct of yours? It's there for a reason, and it's usually quite accurate.
Everyone has a different tolerance level. I'm content to look at properties in "sketchy" neighborhoods, whereas others might not. I certainly don't need to feel comfortable living in an area for me to want to own property there, but that's just me.
We all have to do what lets us sleep at night.
Good points everyone.
I think if you're going to go into D neighborhoods, you need to see if there is potential of the neighborhood improving. Some of the highest yields on profits are finding the D neighborhoods and watching them turn into C and B neighborhoods.
That being said, if you are finding out that majority of the neighborhood crime is drug related. I would stay clear.
Find out what the city is planning to do with the neighborhood. Are they cleaning up the streets. Improving the roads, sidewalks and offering incentives for investors to come in and help.
But remember cities planning department change their minds like I change my clothes. So just because you hear great things, wait until the city has started. You don't need to be the first person in you get a great deal. Wait until construction is under way, then come in and grab a great deal.
Another way to see how the area is doing is to call up 5 businesses and speak to the managers and get their opinion on the area. Just make sure you ask a few, some may be very bias because they grew up there.
Many threads on this topic already.
Here is one:
http://www.biggerpockets.com/forums/52/topics/43032-neighborhood-that-you-wouldn-t-consider-investing-in-
Here is a search to show more if you'd like to see more:
http://www.google.com/search?q=%22war+zone%22+site%3Abiggerpockets.com&hl=en
I live and invest in St. Louis and a big thing that my partner and I use to judge blocks here are the alleys. Are they littered with trash? If so, is it one spot or is it the whole alley? If it's the whole alley, that's a big red flag for us that the people who live around there don't care for their surroundings. If it's just a spot, maybe the dumpster was overfilled or the cart got knocked over. Also while checking out the trash in the alleys, you get a chance to take a look at the back of the houses and see if there are cars on blocks, furniture scattered etc. If the inspectors come out, they are more likely to ding people on the front of the house and not the back so the back may give a different impression of what the block is like. It also gives you a chance to take a look at the flip side of the block as, at least in South St. Louis anyway, things can be different on a block by block basis and it's good to know what you share an alley with.
We also take a look at the % of multi family properties on the block. We figure the more multi-families on the block, the more turn over and the unknown of what it is going to be like from year to year. Not that multi-families are a bad thing, it's just something to keep in mind if you're having a difficult time deciding between 'war zone' and 'low income'.
Both "bad neighborhood" and "war zone" are very subjective terms and Deuce hit the nail on the head in regards to the gut feeling. I don't think you would want to buy in either one but neither necessarily apply to low income areas. You can find a lot of home ownership and pride in low income areas and a lot of people who, for whatever reason, still want to live in those areas. Housing in low income areas is challenging and you have to weigh a couple of key factors: Will the person WILLING to buy here qualify for the purchase? Will the renting in this area be more work (turn-over, issues) than you are willing to invest?
I agree with Nick. I look at properties somewhere in between. I have found that it is rare to find good investment properties in either war zones or high end neighborhoods. My perspective though is based on the properties ability to cash flow.
I invest in "bad" neighborhoods in Baltimore. We deal mainly with sx8 and other programs, so it sort of goes hand in hand. These are not war zones, just lower income neighborhoods.
Have you read this yet? I invest and work with her, and we do not consider a purchase a deal unless it cash flows a minimum $300 a month.
http://www.biggerpockets.com/renewsblog/2011/02/04/positive-cash-flow-landlord-example/?utm_source=BiggerPockets+Newsletter&utm_campaign=12a5099961-February_6_2011_Newsletter2_6_2011&utm_medium=email
I think Mitch nailed it with his reply. On the other hand, I have increased my farm area by visiting areas that were in my mind previously off limits. Increased farm area has also increased the number of offers I make.
Don
One thing to remember to is neighborhoods change big time from 9am to 9pm. A property and area can look decent on a Tuesday at 11am. Saturday night at 2am it may look completely different. We manage in several areas that look great during the week during the day, no one is out, looks decent. At nights and weekend the area has had gang killings, drugs, etc. If you came in from out of town and looked at it during the day you would think the area was ok
I invest in low income neighborhoods rent to owner ratio is around 3:2. I also live in the area. My perception has changed greatly in my time living here. Everyone needs a place to live within their means. Money can be made in all areas if done correctly.
There are pros and cons to good and bad neighborhoods. It matters on your tolerance to the specific cons and your desire for the specific pros.